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A Liberal Perspective On How Political Pressure....

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Old August 31st 09, 07:06 AM posted to rec.audio.opinion
Bret L
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Default A Liberal Perspective On How Political Pressure....

Alyssa Katz’ Our Lot: A Liberal Perspective On How Political Pressure
To Boost Minority Homeownership Helped Blow Up The Economy.

By Steve Sailer

>> "Our Lot: How Real Estate Came to Own Us by Alyssa Katz, [Email her] a liberal journalist and NYU journalism professor who writes for Mother Jones, is the best book yet on how the sacred cause of “diversity” merged with pedal-to-the-metal capitalism to bring us the Great Mortgage Meltdown.

The book hasn’t garnered the attention it deserves—probably because it
makes clear the bipartisan responsibility of both her opponents on the
Right and her friends on the Left.

Our Lot focuses equally on the misdeeds of both capitalists and
leftists. But I won’t give the boiler room boys as much attention in
this review because they’re a more familiar tale, while Katz’s
reporting on the role of her side is compelling “testimony against

Katz is remarkably frank about how government programs and political
pressure to boost minority homeownership helped blow up the economy.
She’s particularly good at explicating how leftist housing activists,
such as ACORN and Gale Cincotta, the godmother of the Community
Reinvestment Act, worked with Democratic politicians such as Bill
Clinton, HUD Secretary Henry Cisneros, and Jim Johnson, CEO of Fannie
Mae, to lay the groundwork for the Bubble and Bust.

Katz doesn’t devote quite as much depth to the Bush Administration’s
culpability (which, to my mind, is even greater). Perhaps she lacked
Republican contacts to give her the kind of inside story she got on
her own party’s mistakes.

Still, Our Lot makes clear that on housing policy, the Clinton-Bush
years form a single continuum with one overarching plan: boost the
minority homeownership rate by lowering credit standards. I call it
the Era of Multi-Culti Capitalism.

And there’s little reason to think that its lessons have been learned

Katz begins her book in 1972, in the collapsing Austin neighborhood on
Chicago’s Far West side, where Gale Cincotta was a Greek-American

Fortuitously for me, Our Lot fills in the political backstory of my
own in-laws’ lives. My wife grew up in Austin, which had been a
peaceful, densely populated working class where small children could
play safely on the crowded sidewalks. Suddenly, in the late 1960s,
middle class blacks began buying into the neighborhood.

Friends warned my late father-in-law, a classical musician and union
leader, to flee, that underclass blacks would follow. But he and my
late mother-in-law, a schoolteacher, resolved to show that integration
could work.

After my future wife was mugged twice and her younger brother once,
however, my in-laws finally sold in 1970—losing half their life
savings. They moved 63 miles out of Chicago, to a dilapidated farm
where they lacked running water for their first two years. (And my
father-in-law started voting Republican.)

How did this disaster hit Austin? Katz demonstrates that it was the
direct result of a 1968 change in the Federal Housing Administration,
which set off a bubble and bust in America’s inner cities, like a
smaller precursor of this decade. As in 2005,

“In 1972, in Chicago and in every other city in the nation, almost
anyone could get a home mortgage, including borrowers who didn’t earn
enough to pay them off, on just about any house, for any reason. … And
just like the recent adventure in lending beyond any rational limits,
the mortgage disaster of the early 1970s was born from a lofty
ideological conviction that enabled the basest of crimes and most
foolish of gambles under its cover, insulated from almost any scrutiny
until the damage was already done.”

Franklin D. Roosevelt had started the Federal Housing Administration
to insure home loans, and Fannie Mae to buy loans from lenders.
Together, these agencies created the familiar template of 30-year-year
fixed rate mortgages with a moderate down payment that underpinned the
growth of home-owning suburbanites after WWII.

FDR’s FHA, however, was reluctant to back loans in black neighborhoods—
a practice that Cincotta later dubbed “redlining”. Eventually, in
1968, liberal Illinois Republican Senator Charles Percy and the
Johnson Administration revamped the FHA in a more politically correct
direction. Katz explains:

“The FHA was now, in effect, a front in the War on Poverty. … Under
the new regime, homebuyers living in Chicago and other inner cities
weren’t just eligible for loans. Lenders who signed up to sell FHA-
insured mortgages were asked to do everything they could to make sure
the buyers got them.”

Of course, the results of the Federal government’s encouraging
mortgages with down payments of never more than $500 were absolutely

“Across the country, neighborhood destruction became a booming
business, financed by the federal government. In Chicago they called
it ‘panic peddling.’ In New York, it was ‘blockbusting.’ … The FHA-
insured loans threw gasoline on that smoldering fire. … Indeed, the
insurance made it profitable to seek out the most impoverished and
unreliable borrowers, since the sooner a borrower defaulted on a loan,
the more quickly the lender would get paid back in full by FHA.”

In Chicago, Gale Cincotta started a national coalition of “community
activists”, who helped pass the Home Mortgage Disclosure Act of 1975
and the Community Reinvestment Act of 1977. Cincotta remains a heroine
to the author, although she can’t quite make clear Cincotta’s logic.
If the feds encouraging lending to minorities had destroyed Austin,
how was more hair of the dog that bit you supposed to fix Austin?

Sadly, Austin remains unfixed. On a visit to Chicago earlier this
month, my wife drove by her old house. Her former home had no
doorknob, just an empty hole in the front door. But at least it was
still standing, unlike two large apartment buildings on her old block,
which are now just crabgrass-covered vacant lots.

Cincotta died in 2001—across the municipal border from Austin in Oak
Park. In telling contrast to Austin, that prosperous suburb that had
succeeded in saving its famous district of Frank Lloyd Wright homes
(where my father was born in 1917) by limiting the number of blacks
allowed to move in through its notoriously illegal but effective
“black-a-block” quota.

Katz notes that Cincotta’s organization of the left, combined with the
invention of mortgage securitizing by investment banker Lewis Ranieri
in 1983, made possible the disasters of this decade.

Cincotta began siccing her “pushy capitalist radicals” on Fannie Mae,
which remained reluctant to buy the dubious mortgages of likely
deadbeats. Still, Katz writes, “The reality was that to meet its
growth objectives, Fannie Mae needed these poor people as much as the
poor people needed them.”

Looking back from 2009, Katz asks:

“How did Fannie Mae and Freddie Mac … turn into the world’s biggest
funders of Wall Street-backed subprime mortgages? … It all started
with the best of intentions, with … the activists who demanded bank
loans for the poor and urban.”

Democrat Jim Johnson took over as CEO of Fannie Mae in 1991. He soon
came up with a nice round number as a goal: one trillion dollars to
lend by 2000 to ten million incremental homeowners. Katz writes:

“Jim Johnson only needed to point to the Atlanta Journal-
Constitution’s [Pulitzer Prize-winning investigative series] The Color
of Money to show that he was embarking on nothing less than a civil
rights crusade. …”

Fannie Mae wanted to raise the homeownership rate to 75 percent, which
meant, Katz notes, that “Consumers would have to borrow more and pay
less up front.”

Johnson, whom Barack Obama had put in charge of vetting his Vice-
Presidential candidates until it was revealed that he had snagged a
cheap mortgage as a “Friend of Angelo” [Mozilo], quickly found a
private partner:

“By 1993, he’d made a deal with [Mozilo’s] Countrywide to buy $2.5
billion in loans for lower-income and minority borrowers. Financially,
these homebuyers would be a motley lot, with no money in the bank,
other debt to deal with, and less than stable employment. … Fannie Mae
targeted much of its advertising budget to Black Entertainment
Television and made a sponsorship deal with Univision, the dominant
Spanish-language TV network. … The advertising campaign explicitly
targeted young families, new immigrants, and single parents.”

Katz points out the culture-changing role that Fannie Mae played:

“More than anything, Fannie Mae made working people comfortable with
the idea of taking on vast debt as the price for participating in the
American Dream. From 1989 to 2004, mortgage debt for low-income people
increased by 46 percent, compared with just 15 percent for upper-
middle-income and 5 percent for high-income.”

Johnson, to his credit, retained important limits on debt, such as 3
percent minimum down payments. But George W. Bush would go to war
against down payments in 2002.

Meanwhile Johnson’s allies in the Clinton Administration decided to
goose the homeownership rate to at least 67.5 percent. But who was
left to lend to? Katz comments:

“The reality was that the consumers the [mortgage] industry had
depended on … were spoken for. More than nine of every ten suburban
middle-class white households owned their homes. If the industry were
going to grow, it would have to tap new borrowers, and HUD’s research
team concluded that those were going to be urban, black (only 43
percent were homeowners), Latino (41 percent), and people under age
thirty-five (just 38 percent).”

So Clinton decided to enlist the real estate and financial industries
in Fighting Racial Bias for Fun and Profit. Katz quotes him from a
1994 speech to the National Association Of Realtors Conference:

“ ‘I want to target new markets, underserved populations, tear down
the barriers of discrimination wherever they are found,’ he proclaimed
to cheers at the Realtors’ annual convention.”

Did Clinton really believe that in 1994 lenders were passing up
profits out of prejudice? This theory was always economically
illiterate. As Gary Becker's Ph.D. thesis (based on a suggestion by
his adviser, Milton Friedman) pointed out, if firms were irrationally
discriminating against minorities, it would be profitable for
nondiscriminators to enter the market and cash in. The much-hyped 1992
Boston Fed report that claimed to prove discrimination existed was
easily refuted at the time by Peter Brimelow and Leslie Spencer in
Forbes Magazine, when they demonstrated that it had misunderstood the
meaning of mortgage default rates. But no-one wanted to hear that.

Still, if you had doubts about discrimination claims, Clinton had
another argument for you: his National Homeownership Strategy would
transform dissolute renters into respectable middle class citizens
through the responsibility-generating magic of owning a home.

Unfortunately, this theory was based on the usual social engineer’s
misperception that correlation equals causation. Katz writes:

“Eventually, scholars found that once they set aside the various
traits that tend to determine whether someone chooses to own or rent
one’s home, the homeowners and tenants really aren’t all that

And, it turns out, some people just aren’t responsible enough or
capable enough to buy a home.

Hiring “diverse” mortgage brokers only exacerbated the situation:

“The experience in neighborhoods confirmed what Fannie Mae’s market
research was also discovering: Borrowers who were new to home buying,
especially if they were members of minority groups, tended to care
more about how they were treated by the person selling them a loan
than about the financial soundness of the loan itself. If it were a
friend or a family member selling the mortgage or property, so much
the better.”

Subprime lending grew—but as long as Fannie and Freddie wouldn’t bless
it, the problem might remain chronic rather than critical. However,
under Clinton the mandates were already in place that were pushing
Fannie and Freddie to covertly back subprime mortgages. Katz:

“Remember what [community activists] won back in 1991: By now, nearly
half of the loans financed by Fannie Mae and Freddie Mac had to go to
low-income borrowers and urban communities. … “

But where can you find enough borrowers who are both poor and prime?
Fannie and Freddie couldn’t. So they started buying mortgage-backed
securities that mixed some subprime in with prime. Katz explains:

“By buying prime-heavy portions of the securities as investments,
Fannie and Freddie could meet Congress’s quotas for the number of
loans they had to finance for low-income borrowers. … But because the
riskier parts of the pools consisted almost exclusively of subprime
loans, Fannie Mae and Freddie Mac were effectively putting their
billions into financing subprime lending…”

Momentum was building: “Under HUD secretary Andrew Cuomo, the Clinton
administration gave a parting gift to the burgeoning subprime
industry”: Cuomo raised the government-sponsored enterprises’ quotas
for lower-income borrowers from 40 percent to 50 percent.

Most of the pieces were now in place for the foolhardy Bush
Administration to push to a cataclysmic conclusion. That didn’t stop
Bush from adding his special flavor, though:

“To this brew, George W. Bush added something quite peculiar for a
conservative: a racial quota. Under pressure from the Bush
administration, which had launched an investigation into their
financing practices, in 2002 Fannie Mae and Freddie Mac together
committed to finance $1.1 trillion in loans specifically for minority
borrowers. … By the time George W. Bush left office, HUD decreed,
three out of every five mortgages financed by the government loan
funds would have to go to the poorer half of America …”

Katz doesn’t give Bush as much of a drubbing as he deserves. But she
does tell the story of a Mexican carpenter in Arizona, Jorge Sotelo,
who was employed doing the jobs Americans just won’t do (namely,
building houses Americans just can’t afford). This immigrant had such
a bad credit history that he couldn’t qualify for even a subprime
mortgage. So he had to have his uncle to sign for it:

“Sotelo thought it was a joke when, in March 2004, his boss at a
construction firm told him to prepare to meet the president, not of
the company but of the United States. Jorge Sotelo would appear with
George W. Bush as an exemplar of minority homeownership. … ‘No tienes
que estar nervioso. Esto va a ser muy sencillo y muy divertido,’
President Bush reassured Sotelo backstage… [‘No need to be nervous.
This is going to be very simple and very fun.’]”

By the way, Katz runs into the same problem I’ve had finding coherent
quotes in transcripts of Bush’s speeches: he always mangled key

“‘There is a minority homeownership gap in America,’ Bush shared with
the audience in the vast hangar. ‘Not enough minorities own their
homes. It seems to me’—he paused to thump his palm on his chest,
confessionally—‘like it makes sense to help all people own their own
homes.’ Bush peered down to a lectern to locate the number he was
looking for. ‘Five point five new—million new minority homeowners into
homes over the next five years.’” [Transcript]

The President invited Sotelo and his wife to a White House Christmas
party that year, but the expense left them short of cash. And they
wanted two new cars.

“So they were grateful when they started getting offers for home
mortgages that would let them get cash back in the transaction. In the
two years since Jorge Sotelo’s convergence with George W. Bush, Jorge
had turned from a pariah into a desirable customer.”

Sotelo extracted $246,000 out of his home equity—which is a lot more
than the house is worth today. But don’t worry:

“Sotelo’s got it all figured out. With a low enough mortgage payment,
they could cover the bills by renting the Avondale house to a tenant.
He’d move his family out to a new place.

They’d be renting that home, right?

“‘Oh, no,” says Sotelo, surprised at the question. ‘We’ll own it.’”

Katz sums up this decade:

“This was everything Gale Cincotta had fought for—and a worse
nightmare than she could have imagined.”

The Mortgage Meltdown, and the Diversity Recession that it has
precipitated (if we’re lucky), are worse nightmares than any of us
could have imagined.

Unless we look frankly at the causes, it will all happen again.

Alyssa Katz goes at least some way to doing that."<<


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